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Topic: Deductibility of margin interest (Read 726 times)

Lets say I want to buy a new home first and then sell my house after I move. I don't have the 20% down payment in cash, but I definitely have the equity in my current home. I've got a bunch of investments at Interactive Brokers.

Please let me know if my understanding is correct:

If I just withdraw the down payment from my account (around 2.6% today), then I can't deduct his as an investment expense because buying a second house is not considered an investment.

If I sell securities in the amount of 20% and withdraw the proceeds, I can then buy back the same securities on margin and this interest would be considered a deductible investment expense. If the securities are at a loss, I might have to consider wash sale rules for capital gains purposes, but otherwise this would work, yes?

That is the way it works in canada. Borrowing to earn interest or dividends (stocks must pay dividends for this to work) is allowed to be deducted, as long as you can show a direct connection between loan--> purchase income / dividend producing investment. Using margin from your investment account is very easy to show that link.

I see this done for some of our wealthier clients buying high end homes. They'll get a $1mil mortgage then borrow against their stock accounts for the rest. Margin interest is currently deductible as an investment expense as long as the stock account is pledged as collateral. Use of funds does not matter.

I see this done for some of our wealthier clients buying high end homes. They'll get a $1mil mortgage then borrow against their stock accounts for the rest. Margin interest is currently deductible as an investment expense as long as the stock account is pledged as collateral. Use of funds does not matter.

So you you are saying option 1 would actually be deductible? That would be really easy, but do you have any link or source?

I have done this myself and deducted. You should check with a CPA, of course, since I am not one. I sent you a private Tapatalk message with some other info that veered from your original tax question topic. Let me know if you find it helpful.

I used margin against my brokerage account in 2014 for a "second" home. I actually needed to bridge the time difference between selling my old home and buying my new one and come up with the down payment.

The interest was reported by Fidelity and fed right through turbotax and deducted.

To your original question, I see this done all the time for clients. Wealthy individuals may strategically use debt and almost always borrow it against a business asset or stock account because those interest expenses are deductible.

This article coincides with what I understand about the interest deduction rules. Not to say that people don't still deduct it since they get a form from the investment company. I think the rules are bad here because it's just how you spend the money. In your example, selling and then re-buying should not make a difference. I'm not an accountant, but I wouldn't be surprised that if you were audited they may still consider the second situation to be non-deductible because you used the money for a house. Something similar to the wash-sale rules.

This article coincides with what I understand about the interest deduction rules. Not to say that people don't still deduct it since they get a form from the investment company. I think the rules are bad here because it's just how you spend the money. In your example, selling and then re-buying should not make a difference. I'm not an accountant, but I wouldn't be surprised that if you were audited they may still consider the second situation to be non-deductible because you used the money for a house. Something similar to the wash-sale rules.

Yeah, thatís what worries me. Something along the lines of latitude to look past the details of a transaction to interpret intention or effective result not in conformance with law